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ENERGY Carbon emissions are in the air and Wall Street is cautious

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As if uncertainty over future energy prices weren't enough to worry about in recent years, metals industry analysts must now mull the potential impact of a possible carbon tax. One thing is certain, though the steel industry, in particular, has reduced its energy consumption.

Energy consumption has dropped to 13 million British thermal units (mmBtus) per ton of steel produced, according to the American Iron and Steel Institute, down more than 27 percent since 1990 and more than 60 percent since 1970. Just how evenly the reductions are spread throughout the industry might be another matter, however.

"I don't think that the integrated mills have come down that much," Charles A. Bradford, president of Bradford Research/Soleil Securities Inc., New York, said. He gives credit for the overall decline in emissions to electric furnace mini-mills, which he estimated emit roughly 1 ton of carbon for every ton of steel produced vs. 3 tons of carbon per ton of steel for integrated producers.

Not surprisingly, this view is supported by the president of the trade association most associated with mini-mills, the Steel Manufacturers Association, which estimates that electric-arc furnace mills use just one-quarter to one-third of the energy required by equivalent integrated mills. But SMA president Thomas A. Danjczek said that EF producers' costs are being continually pressured upward, and during the past two years electricity prices for the average SMA member have probably amounted to a minimum of $7 per shipped ton while natural gas costs have nearly doubled, tacking on another $10 a ton.

In the primary aluminum industry, there's even more doubt as to how competitive U.S. producers can remain in the years ahead. Lloyd T. O'Carroll, metals equity analyst at Davenport & Co LCC, Richmond, Va., noted that, globally, the median price paid for electricity is $27 per megawatt hour, well below the $75 per MWh at some U.S. sites, even though certain domestic plants are paying in the mid-$30- to $40-per-MWh range, rates that he views as "competitive." (This doesn't include Canadian producers like Alcan Inc., Montreal, which enjoy world-class low-cost hydropower.)

But O'Carroll points out that a crucial question is how much more a U.S. producer, who might be paying $35 to $40 per MWh today, will be paying over the longer term. Moreover, forecasts must now include not only the more traditional factors, such as the effect of rising coal prices, but a shifting reliance in future years toward natural gas-based power, which will help boost blended average power costs, and the cost of environmental cleanups. And today there's also the more recently emerging issue of a possible carbon tax.

Indeed, a growing number of analysts seem to agree that energy's impact on the metals industry is now likely to go beyond price and supply forecasts for natural gas, electrical power and coal.

James Moss, a partner at First River Consulting LLC, Pittsburgh, said that unlike in the United States, the idea of carbon mitigation is no longer considered a peripheral concept in other developed nations.

"People look at the carbon content" of manufactured goods in Europe, Moss said, suggesting that it's likely that one day this could be the case here. "It's not yet an issue for the steel industry, but it could very well be one in future legislation. With an industry that's been making the kind of money that it's been making, and the environmental impact that it has, it won't take too long for politics to find it."

Nick Sowar, a partner at Deloitte & Touche LLP in Cincinnati, sees continuing pressure to take down inefficient front ends, and believes that concerns about energy will help to accelerate this trend. "We're going to see a more international approach to where melting takes place," he said, citing the combination of Mumbai, India,-based Tata Steel and Corus Group Plc, which could result in the latter's European operations importing more semifinished feedstock. There's also the expected shift of global front-end production to such resource-rich countries as Brazil.

In the United States, the Sparrows Point, Md., facility being divested by Mittal Steel USA Inc. comes to mind "as a great location to be bringing in semifinished product" due to its coastal location.

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